NFT licensing fees, otherwise known as royalties, are an asset for artists struggling to create a sustainable business model in their art. Intelligent contracts, on which NFT royalties are based, have no enforcement mechanism or other legal liability. It would seem that this technology is fine as long as non-exchangeable token platforms commit to it, such as OpenSea. How is it really? And how do royalties work…? We will answer these questions in today’s lesson.
But before we get into the substance, recall how NFT tokens work.
NFT licence fees – definition
If you’ve already recalled what NFT tokens are and how they work, we’ll focus on the definition of NFT royalties (NFT royalties). NFT royalties, otherwise known as royalties, are payments to the original creator, for each secondary sale, of digital assets created by him. Interesting, right? Cryptocurrencies will never stop surprising us!
The rules for paying royalties to NFT are encoded in smart contracts on the blockchain network. Developers set the percentage of royalty payments as early as the NFT creation stage. At the secondary sale stage, the smart contract will assign this specified percentage from the sale, as a royalty, to the creator of the non-exchangeable token.
Interesting fact: one intriguing case of passive earning, based on NFT royalties, would relate to the “Crossroads” collection by Beeple. Resale of the collection on the secondary market amounted to as much as $6.6 million! The author of the tokens received 10% of this transaction as a royalty. So, you can see how much royalties contribute to the monetization of various works of art.
How do NFT royalties work?
Their system of operation differs between blockchains and the platforms on which NFT is issued. In the case of Ethereum, the percentage of secondary sales of a non-convertible token is determined by the smart contract.
On the other hand, on Rarible, the artist himself can set the resale percentage, already at the stage of beating his NFT. Moreover, of course, using a smart contract on the blockchain. When his work is purchased, Rarible will automatically fulfil its terms.
Remember that each platform differs in the specifics of its payout schedule.
Interestingly, such terms nevertheless do not constitute a legal contract that can help eliminate litigation.
How do NFT royalties work?
Such royalties clearly define the meaning for artists. According to the definition you are already familiar with, NFT royalties work using smart contracts that define a percentage of the secondary sales of a given NFT. The smart contract automates the entire process, as it enforces the rules it defines for each secondary NFT sale.
How does a smart contract do that? You can read about it here.
Smart contracts take care of the entire process and deliver the due payment to the creator. Thus, they eliminate any intermediary – the percentage is immediately and directly delivered to the creator. What’s more, secondary sellers and even the artists themselves cannot interfere in the process of paying a percentage for royalties.
In all this, you must remember one thing – royalties do not apply to all NFTs. The benefits of royalties come to the creator, then, if he specifies it in intelligent contracts. If not – he has nothing to count on a percentage of secondary sales.
Licence fees for non-convertible tokens apply to digital content, in-game items, collectible items, physical game accessories and similar assets.
However, not all markets are open to royalties. Although this is a nod to artists and NFT creators. New marketplaces such as Bluebox have a new and innovative approach to content creation. Simply put – they bring more benefits to artists.
How do royalties work? What are the components of their percentage?
It’s worth knowing how royalties NFT work to take full advantage of their potential. The good news is that we can track each royalty on-chain.
The developers of NFT specify a percentage of royalties at the level of smart contract. So, how do you determine the operation of such a percentage in practice?
Unfortunately, as we mentioned earlier, not every platform offers the NFT licence fee. However, the good news is that more and more NFT markets are joining this trend. How does this work in practice?
We buy an artist’s work for 10 ETH. The creator has earned 10 ETH for his work. At the same time, if the author has factored in royalties, he will receive 10% from secondary sales of his NFT.
It works the same way if the creator exhibits the artwork at a higher price. For example, a buyer has held an auction of a particular artwork and obtained 300ETH from a secondary sale. The smart contract kicks in and at the time of this sale, reserves 10% from the sale for the creator, or as much as 30ETH. At the end of the whole process, the original creator would receive royalties for each, subsequent sale of his work. Beautiful!
NFT royalties, and credibility
You may have doubts about the reliability of NFT royalties, especially since they are unregulated by law.
On the other hand, let’s note that they are defined on blockchain technology. And this offers us an immutable and completely transparent ledger for documenting all transactions of non-exchangeable tokens.
Importantly, it is the blockchain that helps us secure the authenticity and integrity of each NFT. Smart contracts then serve as fully automated protocols, and it is these protocols that enforce the terms and conditions of the royalties for specific works.
Such automated payment, of course, to the original creator, completely removes concerns about fraud.
Are licence fees transferable between different NFT platforms?
The royalty policy varies depending on the platform and the definition of the smart contract. Therefore, it is not possible to automatically transfer them between markets of non-convertible tokens.
Besides, NFT markets also differ in their policies. On OpenSea, we get royalties only for collections, while on Rarible we get royalties for individual pieces. Moreover, OpenSea allows a maximum of 10% royalties, where the limit on Rarible is as much as 50%!
Are NFT royalties effective and profitable?
The answer to this question is not clear. In the early stages of NFT development, creators and artists were even able to make millions of dollars in profits from royalties. Currently, many platforms are joining this trend, which at the same time leads to a decline in revenue from the sale of non-exchangeable tokens.
Many of the NFT projects have been shut down precisely because of the conditions that exist on the secondary market. On the other hand, some projects such as DeGods have completely abandoned the royalty option.
However – for individual creators, such revenues from sales on the secondary market exceed their earnings from classic sales. Finally, let’s also note an important point – revenues from royalties can increase the total trading volume in the market for non-convertible tokens.
Benefits of royalties
Certainly – passive income. The creators of NFT could, through them, provide passive income from their work.
As a result, such an artist would gradually increase his earnings with each passing year, based on just passive income.
NFT royalties are also a good indicator to measure how an artist’s work gains value over time. Therefore, payments of royalties would enhance an artist’s reputation in the market for non-convertible tokens.
The future of NFT royalties
Critics of royalties speak quite unfavourably about them. According to them, royalties, are a desperate attempt to keep users on the platform and try to involve them in the ecosystem.
It would seem that the industry has found itself somewhat at a fork in the road. The alternative is simply to find another solution to the subject. You can’t have a stick and a carrot at the same time!
Summary
You already know what the licence fees for NFT are. Developers can specify in smart contracts a percentage from sales on the secondary market. Unquestionably – this is an interesting option for them and at the same time an opportunity to earn passive income.
On the other hand, you must remember that a platform is not equal to a platform and each platform, has its policy as to NFT royalties. Furthermore, consider that not all tokens classify tokens. However, you already know this from our lesson today!